RBI continues to shop for US bonds for 4th month in a row

Mumbai: The Reserve Bank of India has extended its US bond buying spree to the fourth consecutive month, amid surging US treasury yields.

India’s investment in US treasury securities surged by a net $9.2 billion in August to $221.2 billion, the highest in nearly two years, show latest data compiled by ETIG. A tiny part of holdings may also be coming from corporates.

Investing in US treasury has a twin advantage at a time when the US Federal Reserve is increasing rates and the dollar is getting stronger, said Bank of Baroda chief economist Madan Sabnavis. It helps gain higher returns in the long term. “Also, investment value remains strong. Any other currency will face depreciated value on principal in the present environment,” he said.

The Dollar Index, which measures the greenback against other major currencies, rose nearly 11% during January-August. Since then, it has further gained more than 5%, and is not showing any signs of softness, with the US central bank hiking rates.

RBI Continues to Shop for US Bonds for 4th Month in a Row

India now ranks 12th in terms of US treasury holdings, after Brazil but ahead of Canada. Japan remains at the top of the table, owning around $1.2 trillion of the sovereign securities.
With the US Federal Reserve waging a war against hot prices, the benchmark bond yields have leapfrogged, factoring in aggressive rate hikes.

Global geopolitical tensions have sent energy prices skyrocketing with developed economies getting blighted by record high inflation, be in US or UK.

“At this point of time, the US dollar is perceived to be the most reliable currency,” said Sandeep Bagla, chief executive at Trust Mutual Fund. The US bond yields have built in most of the expected Fed rate hikes. It makes sense for the RBI to increase their holdings in US government bonds that are offering attractive yields, not seen in the past many years.”

The 10-year US Treasury yield spiked about 263 basis points this calendar year. Last week, it rose to 4.29%, the highest since 2007. The yield was 3.18% at end-August.

Holding in debt securities becomes unattractive when yields rise – higher yield suggests lower price. From the balance sheet perspective of the investor, there is a mark-to-market loss to the investor when yields rise, as the value of the portfolio contracts.

But higher yield also means the US treasury securities, considered to be the safest, are available for purchase at a lower price, and there will likely be gains in the long term.

“While our central banks do not really aim for immediate gains, such investments allow the RBI to make strategic allocations amid ongoing global uncertainties,” Bagla said.

Between January and August, the RBI has invested $22 billion in US treasury bonds versus $0.80 billion in the corresponding period last year, Bloomberg data showed. The stock of US treasury securities held by India was $199.8 billion in December 2021.

In between, the RBI reported a sharp depletion in the country’s forex reserves. Forex reserves dropped to $528.3 billion as on October 14 this year compared with a record peak of $642 billion reported on September 3, 2021. Despite the erosion of dollar stock, the reserves are still considered healthy.

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